Analysts' corner

RESEARCH CALLS

RELIANCE COMMUNICATIONS
Reco price: Rs 729
Target price: NA
Current market price: Rs 759.95
Upside: NA
Brokerage: Edelweiss

Reliance Communications (RCOM) offers investors a unique mix of voice and data business streams with an opportunity to play the India and global telecom growth story, with its pan-India wireless network and an integrated business model.

Investors can buy into both GSM and CDMA offerings, global business in the form of Flag and Falcon, and a robust enterprise broadband business.

Edelweiss envisages multiple growth drivers for both mobility and non-mobility businesses, bringing certain amount of secularity and visibility to RCOM's earnings growth and profitability over FY07-10.

The recent spate of regulatory recommendations including permitting rollout of multiple technology services under existing UASL license, tightening of subscriber-linked criteria for GSM spectrum allocation and introduction of MNP are likely to bode favourably for RCOM.

The public listing of RCOM's tower subsidiary Reliance Telecom Infrastructure (RTIL), listing of Flag, hive-off of SEZ and BPO businesses, and the option value of its IPTV and DTH ventures are likely to be the price catalysts for the stock.

Over FY07-10, Edelweiss estimates RCOM's top line to grow at a 29 per cent compound annual growth rate (CAGR) to Rs 31,300 crore, and net profits at a robust 35 per cent CAGR to Rs 7,900 crore.

The brokerage arrives at RCOM's fair equity value at Rs 861 per share using sum-of-the-parts (SOTP) methodology. It estimates the company's enterprise value per share (EV/share) for core businesses at Rs 731 (including Rs 33 for 15-circle GSM entry), RTIL at Rs 126 with option value of new businesses (IPTV and DTH) at Rs 25.

At Rs 729, the stock traded at an enterprise value/ earnings before interest, tax, depreciation and amortisation (EV/EBITDA) multiple of 13.6 times estimated FY09 and 11.1 times estimated FY10 earnings. The brokerage recommends a "buy".

IVRCL INFRASTRUCTURE
Reco price: Rs 495.35
Target price: Rs 597
Current market price: Rs 518.80
Upside: 15 %
Brokerage: Macquarie

IVRCL's capabilities span a wide range "� irrigation, drinking water supply, sewage systems, industrial water supply systems and desalination projects. The brokerage is extremely bullish on the urban water supply and industrial demand for water solutions.

Although irrigation projects in Andhra Pradesh, which are a significant portion of the order backlog, would decline from these levels, Macquarie expects the activity in other states to start picking up.

The company is aggressively pursuing opportunities in roads and transmission and distribution. The momentum in the roads sector is likely to pick up again from the later part of FY08. Total awards for 3,000-4,000 km in next 12 months amounting to investments of around Rs 30,000 crore are likely to be made in the roads sector.

Macquarie expects IVRCL's earnings growth of 34 per cent over FY07"�10 on the back of 25 per cent order inflow growth and moderate improvement in margins from current levels. The net debt to equity is at 0.4 times which means the balance sheet can support strong growth in the next 1"�2 years before dilution.

In the past six months, the stock has significantly lagged the sector on account of the real estate subsidiary's stock price, which is down 25 per cent since listing in August 2007.

Macquarie believes the underperformance is unjustified as the subsidiary accounts only for 22 per cent of the target valuation. Macquarie arrives at a sum-of-the-parts valuation of IVRCL with a 12-month target price of Rs 597 a share, valuing the core business at Rs 419 a share. The brokerage recommends a "buy".

GODAWARI POWER AND ISPAT
Reco price: Rs 309.90
Target price: 420
Current market price: Rs 346.35
Upside: 21 %
Brokerage: IndiaInfoline

In September this year, Godawari Power completed its second phase of expansion.

With this the company increased its capacity of sponge iron to 495,000 tonne per annum (110 per cent y-o-y), steel billets to 400,000 tonne per annum (60 per cent y-o-y) and HB wire rod to 120,000 tonne per annum (90 per cent y-o-y).

With demand expected to remain strong in the next two years, IndiaInfoline expects Godawari Power's output to register 66.1 per cent CAGR for sponge iron, 30.5 per cent CAGR for billets, 26.7 per cent CAGR for HB wires and 17.5 per cent CAGR for ferro-alloys over FY07-09.

Increasing non-availability and rising scrap prices have been the major drivers behind the buoyancy in sponge iron prices. At prevailing price of Rs 14,700 a tonne, which is higher by 15 per cent y-o-y, Godawari Power earns a contribution of around 25-28 per cent on sponge iron sales as compared to about 15-18 per cent on billet sales due to high cost of power in the value addition process.

With expectations of continued firmness in sponge iron prices, the company intends to produce more sponge iron in FY08 and FY09 resulting in improvement in overall profitability and return ratios.

This tactical strategy will also leave some excess power to be sold outside the company. The brokerage expects sponge iron sales contribution in revenues to significantly increase from 9.2 per cent in FY07 to 17.1 per cent in FY08 and 14.9 per cent in FY09.

Led by robust volume growth and improved operating margins, IndiaInfoline expects Godawari Power's profit to witness a CAGR of 65.3 per cent over FY07-09.

At Rs 312, the stock traded at price-earnings multiple of 8.1 times and 6.1 times on an estimated consolidated earning per share (EPS) of Rs 38.90 in FY08 and Rs 52.40 in FY09, respectively. IndiaInfoline recommends a "buy" with a target price Rs 420, which implies a price-earnings multiple of 8 times on estimated FY09 consolidated EPS.